MALTA - An Overview of the Tax Refund Regime and Other Business Incentives and Opportunities

Malta is proving to be a tax and cost-efficient EU jurisdiction for trading and holding activities, financial services and other industries. Malta offers a number of tax and financial incentives for foreign investors. The Maltese economy is a very open one in which foreign direct investment in many of its sectors is vital to its continued growth. The overriding climate is one of encouraging and assisting inward investment particularly in key and targeted sectors such as financial services and related industries. This document contains general legal and tax information intended for investors wishing to set up a Maltese limited liability company or carrying on business through Malta.

Why Malta ?

Malta is an independent state since 1964, a member state of the European Union since May, 2004 and a member of Eurozone since 1st January 2008. There are many reasons to consider using Malta as a base for international operations. These include:
Malta’s strategic location in the centre of the Mediterranean…1 hour flight from Rome
Favourable weather and high standard of living
A convenient European time zone
A stable political situation and a strong industrial relations record
An educated and skilled English-speaking labour force
Excellent communications infrastructure
A culture of hard working professionals
A reasonably-priced location where the cost of living and cost of labour are relatively low by European standards
Interesting real estate and other investment opportunities
A booming and competitive EU jurisdiction for financial services, trading and holding structures

These factors, combined with a modern legal and tax framework, EU-approved tax refunds and participation exemption regime and a wide double taxation treaty network render Malta an attractive and tax efficient EU onshore base for financial services, trading and holding structures. Malta’s legislation package is harmonised with EU law and OECD rules and offers legal certainty for investors.

Financial Services Hub

Malta boasts of one of the fastest growing financial services market and a number of factors, including EU membership, a competitive tax regime and the possibility of passporting rights, have contributed and continue to contribute towards a steady growth of the financial services industry. Malta has a comprehensive set of legislation based on EU law regulating financial services including laws regulating credit & financial institutions, funds and the insurance business, trusts, professional secrecy and privacy (data protection), anti-money laundering and insider dealing/market abuse.

Company Taxation Overview

Companies incorporated in Malta are treated as domiciled and ordinarily resident in Malta and taxable on world-wide income. Companies incorporated outside Malta that are managed and controlled in Malta are treated as resident (but not domiciled) in Malta and taxed on income arising in Malta and income (but not capital gains) arising abroad and received in Malta. Companies incorporated outside Malta that are not managed and controlled in Malta are taxed only on income arising in Malta. It is possible for foreign companies to set up a branch in Malta and carry on business through a branch. The profits attributable to the branch are taxable in Malta and the overall tax burden can be significantly reduced through tax refunds available to the head office. Foreign companies can be redomiciled to Malta.
Companies are taxed at a flat rate of 35% on their chargeable income and capital gains. There is no separate capital gains tax or corporate tax. Gains realised from the transfer of shares, securities, intellectual property and certain other intangible property are treated as part of the income for the year and are taxed at 35%.
The transfer of immovable property situated in Malta is taxed at 12% of the transfer price but the law provides for an option (applicable in certain cases) for tax to be charged at 35% on the capital gain realised.
Local bank interest and other investment income are taxed at source at 15%. The law provides for group relief and exemptions from tax on intra-group transfers of assets. Special tax rules apply and specific tax considerations must be made where the company is set up as a fund or collective investment.

International Tax Provisions

Maltese law contains international tax measures which make Malta a very competitive, cost and tax efficient basis for setting up trading and holding structures. Besides being the only EU member state with a full tax imputation system, Malta’s tax laws allow shareholders of Maltese companies to claim a refund of tax paid by the company. A revised tax refund and participation exemption package was approved by the EU in November 2006 and became applicable as from 1 January 2007. Below are highlights of Malta’s international tax provisions:

combination of a high corporate tax rate of 35% (sometimes useful to defend against anti-CFC rules) and tax refunds to shareholders / participation exemption

EU-approved tax regime

4 types of tax refunds due to shareholders on tax paid at company level (see below)

participation exemption (see below)

no withholding tax on dividends

no withholding tax on interest and royalties paid to non-residents

exemption from tax on transfers of shares and securities held by non-residents (except for shares in companies owning real estate in Malta)

double taxation treaty network with 49 countries (including all EU states except Ireland) 1

other forms of double taxation relief (ex. unilateral relief, 25% flat rate foreign tax credit, underlying taxation)

access to EU Parent-Subsidiary & Interest-Royalties Directives and other EU directives

no thin capitalisation or CFC rules, no express transfer pricing rules

advance revenue rulings on international tax issues (legal certainty for investors)
Albania, Australia, Austria, Barbados, Belgium, Bulgaria, Canada, China, Croatia, Cyprus, Czech Rep., Denmark, Egypt, Estonia, Finland, France, Germany, Greece (awaiting ratification) Hungary, Iceland, India, Italy, Korea, Kuwait, Latvia, Lebanon, Libya, Lithuania, Luxembourg, Malaysia, Morocco, Netherlands, Norway, Pakistan, Poland, Portugal, Romania, San Marino, Singapore, Slovakia, Slovenia, South Africa, Spain Sweden, Switzerland (limited to international air and shipping traffic) Syrian Arab Rep., Tunisia, U.K., U.S.A. (USA treaty limited to international air and shipping traffic. New full USA treaty is being discussed and expected to be finalised soon)

Tax Refunds & Participation Exemption

Maltese companies pay tax at the rate of 35% but upon a distribution of profits, the shareholders are entitled to claim a refund of tax paid at corporate level. The extent of the refund depends on the nature and source of profits and on the account out which the profits are paid (companies are required to allocate profits to various tax accounts).
4 types of tax refunds

6/7ths refund - refund of 30% out of 35% tax thus producing a tax liability of 5%. This is the typical refund due on trading profits.

5/7ths refunds (refund of 25%) due in respect of passive interest & royalties.

2/3rds refund due where the company has claimed double taxation relief.

100% refund due where the profits derive from a Participating Holding (see below)
Profits deriving from real estate situated in Malta do not give a right to tax refunds.

Participation Exemption

Profits deriving from a Participating Holding or from gains realised on the disposal of such holding are exempt from tax. A Participating Holding exists where a Maltese company holds at least 10% equity shareholding in a non-resident company or similar entity – level of equity holding may be less than 10% subject to certain conditions.
It is interesting to note that the company has an option not to claim a tax exemption on Participating Holding but to pay tax at 35% instead. In such case, the company’s shareholders may (following a distribution of profits derived from the holding) claim a 100% refund of the tax paid by the company. This option affords flexibility in planning holding structures.

Branches of Foreign Companies

Another interesting feature of the international tax regime is that foreign companies are allowed to claim a refund of tax paid by their Maltese branch. This rule represents interesting tax planning opportunities for foreign companies wishing to operate from Malta through a branch rather than through a subsidiary.

Other Taxes

VAT

Maltese VAT legislation is harmonised with the EU Sixth Directive. The standard rate is 18% and a reduced rate of 5% applies in respect of hotel and holiday accommodation and other supplies. The law provides for a reverse charge mechanism in respect of intangible services and other supplies in terms of EU law. Maltese VAT legislation also provides for a number of exemptions. Foreign businesses (EU and non-EU) that are not required to register in Malta qualify for a refund of VAT incurred in Malta.

Stamp Duty

Stamp duty is due on the transfer and inheritance of immovable property (5%), transfer and inheritance of shares/securities (2%) and on certain documents originating or used in Malta including insurance policies and banking credit cards. A transfer or inheritance of shares in companies owning immovable property in Malta attracts duty at 5%. Issues and allotment of shares are not subject to duty. The law provides for certain exemptions, including an exemption on intra-group transfers, transfers and inheritance of listed shares and transfers of shares/securities in, to or by a company which operates mainly outside Malta.

Other

Customs and import duty are chargeable in terms of EU law. Excise tax is charged on petroleum, alcohol and tobacco. Maltese law provides for an ecological contribution (Eco-tax) which is chargeable on white goods, plastics and similar items. No other significant taxes are in place. Maltese law does not have a general inheritance tax nor does it impose a tax on property ownership or capital possession. There are no municipality or local taxes.

Setting up a Maltese Company

Companies are regulated by the Companies Act, 1995 which is largely based on UK law. A company has a legal personality distinct from that of its shareholders and the liability of the shareholders is limited to the amount of unpaid share capital, if any. A company may be formed as a private or public company and must have a registered address in Malta. All Maltese registered companies are required to prepare audited financial statements in accordance with International Accounting Standards.
Company registration procedure is relatively straightforward and cost effective. As an indication, a company may be formed within 7-10 days. It is also possible to set up a Maltese branch of a foreign company. A local branch is required to register in Malta as an overseas company and as outlined earlier, foreign companies carrying on business in Malta through a branch can benefit from the same tax refunds that are available to shareholders of a Maltese company.

Other Business Opportunities

Apart from the tax refund and participation exemption regime generally available in respect of all companies irrespective of the type of business carried on, Maltese law contains a number of tax and financial incentives aimed at target and specific industries. Below are some examples:

tax exemptions for shipping and commercial yacht operations

tax and financial incentives for the film industry

special VAT rules on yacht finance leasing

gaming & betting industry

pharmaceutical industry

call centres

information technology, back-office operations and e-services

special rules and tax exemptions on collective investment schemes, funds, fund managers and related financial services

Maltese law also contains an interesting scheme for foreign individuals wishing to take up residence in Malta and benefit from a 15% flat rate tax on their income.

Courtesy of Fiott Advocates , a law firm specialising in tax consultancy and commercial law.

Fiott Advocates core practice areas are tax consultancy and local and cross-border tax planning services. Our firm’s practice areas also include corporate law, general commercial law and special industries. We can provide a comprehensive package services to foreign investors wishing to invest or carry on business in Malta or setting up a Maltese company including:

corporate tax planning, tax and legal advice

setting up and registration of a Maltese company or a branch

company support, back-office and compliance services

international tax issues and cross-border operations

planning tax efficient holding structures and dividend routing

VAT advice and planning

commercial contract drafting and negotiations, joint-venture, franchise, distribution and other
commercial agreements
The above information is based on laws as in force as at 15 March 2008. This document is intended to provide general information and does neither constitute a legal or tax opinion or advice nor does it contain exhaustive information on the subject. No action or decision should be taken upon reliance of the above information without seeking prior professional advice.